Calderón, Obama, and Harper to Meet in Guadalajara, August 9–10: Economic Aspects of the Summit
August 4, 2009
Q1: What is the key economic problem facing the three NAFTA countries?
A1: The financial and economic problems that erupted in the United States in the autumn of 2008 have had especially adverse repercussions in Mexico and, to a lesser extent, in Canada. Each of these countries sends about 80 percent of its exports to the United States; and Canada and Mexico are the two largest foreign markets of the United States. The most important variable that determines changes in a country’s import level is normally the change in that country’s gross domestic product (GDP), and this has fallen sharply in each of the three countries. Consequently, the value of intra-NAFTA trade fell by 34 percent from May 2008 to May 2009. Exports to the United States for both Canada and Mexico constitute about 30 percent of their respective GDPs; hence, each 10 percent decline in these exports reduces each of their GDPs by some 3 percent.
Q2: What are the comparative economic positions of the three countries?
A2: The Mexican economy has fared worse thus far in 2009 than that of any other country in the Americas. The current estimate of the Bank of Mexico, the central bank, is that GDP will fall by 6.5 to 7.5 percent in 2009. This is as large as the economic fall during Mexico’s crisis year of 1995. The difference is that in 1995 Mexico’s economic problems were of its own making, whereas in 2008–2009 the problems were created largely in the United States. Indeed, like much of the rest of Latin America, Mexico’s GDP grew at about 5 percent for five successive years until 2008. Most of Mexico’s exports are manufactured goods linked to manufacturing production in the United States, and these were hit hard compared with other Latin American countries that rely more on commodities for their export earnings. The U.S. economy fell by more than 6 percent in the first quarter of 2009, but by only some 1.2 percent in the second quarter. The GDP decline in Canada is expected to be about 3 percent in 2009. All three countries have experienced high unemployment this year; comparing the rates is difficult because of the way each measures unemployment. The highest nominal rate is in the United States, now 9.5 percent and expected to rise further well into 2010. There have been additional reasons for Mexico’s GDP decline. In the second quarter of 2009, remittances from the United States to Mexico fell by 17.9 percent compared with the same period in 2008. Foreign tourism has suffered from the violence in Mexico, combined with the fall in U.S. spending power. Mexico took severe measures to halt the spread of the H1N1 virus, and this led to reduced tourism. Mexico is also facing a severe drought, and this has been particularly devastating in the corn-producing areas of the country that depend on rainfall.
Q3: What can the three heads of government do to alleviate the problems?
A3: Economic recovery in all three countries depends crucially on the speed and extent of U.S. recovery. The discussion in Guadalajara is thus likely to focus on how well U.S. stimulus measures work and what further action the United States will take if its economy falters in the months ahead. Mexico is likely to raise the problem of U.S. prohibition of Mexican trucks to carry cargo to U.S. destinations, with the hope that this can be resolved along lines agreed to in NAFTA. Mexico earlier raised tariffs on 89 U.S. products by 10 to 20 percent to retaliate for U.S. violation of its NAFTA commitment, but this has hurt Mexican importers of these products as well as U.S. exporters. President Obama will be asked to clarify what, if anything, he intends to do to strengthen the labor and environmental provisions of NAFTA without renegotiation of the whole agreement.
Sidney Weintraub holds the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.
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